understanding personal finance Flashcards
what is money?
a commonly accepted means of exchange for goods and services.
what are the functions of money?
unit of account
means of exchange
store of value
legal tender
what is a unit of account?
money acts as the common base of comparison that people use to present prices and record debts.
provides a value by which we can value different goods and services.
what is means of exchange?
allows people to buy goods and services.
money enables goods and services to be exchange
what is a strore of value?
money acts as a store of value over time
what is a legal tender?
money is legally recognised by all as a payment method for goods and services.
what are interest rates?
the cost of borrowing or the reward for saving. if interest rates rise, savers will benefit and recieve a greater reward.
what is debt?
debt is when expenditure is higher than income.
ways to control costs
avoid high interest repayments or fines from going into overdraft
setting budgets
shop around for the best deals
plan in advance to save money
reasons to avoid legal action or repossession
damage yor reputation
expensive
negative effect on your credit score, affecting the ability to gai finace in the future
loans can be taken out against an asset that belongs to you i.e. repossess assets from you until you make payments
reasons/ways to remian solvent
solvent means to be able to meet your debts
maintain ability to pay your daily/weekly bills
have a reasonsable lifestyle
if a person is not sovent and a creditor calls to inform them of debt, then they would have to sell their assets
reasons to maintain a good creit score
when a person applys for a bank loan or usage of hire purchase to purchase something, the creditor will assess your credit score.
this assesses how likely you will be able to repay the debt
good credit score means you will be able to pay of debts
reasons to avoid bankcruptcy
bankcruptcy is when an individual legally declares themselves as unable to repay their debts
affects future credit score
damage your reputation
ways to generate income and savings
interest paid on savings and therefore generates income, the size of the savings therefore increase.
money can be invested to generate more income, such as buying shares.
income may be invested in assets that will appreciate in value over time.
features of money
money can be saved as insurance
being able to replace lost items
what is inflation?
inflation is the general rise in prices.
methods of payment
cash
debit card
credit card
electronic transfer
cheques
standing order
direct debit
pre-paid cards
contactless cards
charge cards
store cards
mobile banking
bankers automated clearing services (BACS)
clearing house automated payment system (CHAPS)
what is a debit card?
bank provided cards to allow customers to withdraw money from their current accounts or make puchases with the money coming from the current account.
advantages of debit cards
widely accepted
allows cash to be withdrawn
convenient as can withdraw cash from various places
can make contacless payments up to £100
disadvantages of debit cards
need to monitor spending as overspending could be costly
risk of fraud
what is a credit card?
customers can make purchases on these cards and pay the balance at a later date
advantages of credit cards
allows you to spread payment
flexible from some providers such as 0% interest free
widely accepted
depending on the provider, additional benefits such as rewards or insurance
contacless payments is up to £100
disadvantages of credit cards
easy to develop large amounts of debt
interest charges may apply and can quickly accumulate outstanding balances
high charges if you withdraw cash
can encourage over spending
risk of fraudulent behaviour
what are cheques?
a paper transaction giving bank permission to transfer payment from your account to another account
advantages of cheques
saves having to carry around cash
can be used to pay people large sums of money
payments can be controlled
disadvantages of cheques
some businesses no longer accepts cheques
may be charged for each cheque
payment will not be accepted if a customer has insufficient funds.
what is an electronic transfer?
payments made from one person’s bank to another via online.
advantages of electronic transfer
recipient can receive funds quicker
immediate confirmation of money sent
safer than withdrawing cash
disadvantages of electronic transfer
can be difficult to reverse if enter incorrect account details or funds
relies on the wesite to be up
needs to be carefully set up to ensure the tansfer goes to the right place
what is direct debit?
permission for the bank to make regular payments to a third party upon request
amount taken from the bank account may vary
advantages of dircet debit
ensures regualr payments are not missed
can save money if providers offer a discount
varied amounts can be taken from the account
disadvantages of direct debit
you have to make sure there is enough money in your account
amount taken will vary making budgeting difficult
need to reset if bank details change, otherwise important payments may be missed
what is standing order?
permission given to the bank to make regular payments, of a set amount to a third party upon request.
advantages of standing order
bills are paid automatically
can be cancelled at any time
secure method of payment
ensures regular payments are not missed
disadvantages of standing order
money is taken out of your bank account regardless of the balance, therefore could lead to debt
must be reset or cancelled to make any changes
what is a pre-paid card?
a cash balance is held on a card, which then reduces each time it is used
advantages of pre-paid cards
helps individuals stick to a budget as can only spend up to the amount uploaded
can be cancelled if lost
useful for holidays or children as they stick to budget
widely accepted
disadvantages of pre-paid cards
can be difficult to monitor balance
if card is cancelled or lost, money cannot be covered
can be used by others without permission
may invovle a fee to purchase the card
what is charge cards?
allows for purchases to be paid on credit but the total amount is automatically paid direct from a bank account
advantages of charge cards
short term source of credit
can stop users racking up large sums of debts
secure method of payment
disadvantages of charge cards
must pay the statement balance in full when it is issued regardless of funds
may inncur annual or monthly fees
what is store cards?
allows a customer to buy on credit in a particular store or group of stores e.g. Argos
advantages of store cards
may recieve additional benefits from the store such as discounts
can chose how much to pay each month
spread the cost over time
short term source of credit
disadvantages of store cards
only accepted by that specific store
customers could be tempeted to over spends to get special offers
if balance is not payed off within a specific period, interest is applied
may encourage debt
what is mobile banking?
service which allow customers to complete banking on their mobile phones or other portable devices
advantages of mobile banking
quick and easy to use as theres no need to visit branches
secure
disadvanatges of mobile banking
doesnt have the same amount of features as internet banking
relies upon the customer having a device
what is BACS?
allows transfer of payments from one bank account directly to another within 2 hours or quicker
advantages of BACS
transfers completed normally within 2 hours
individual can complete transaction via phones, branches or inline backing accounts
covenient as thers no need to handle cash, make calls or write cheques.
details can be set up for frequent transfers, speeding up the process
disadvanatges of BACS
service cannot be offered by all banks
may incur additional costs
care must be taken that all details are correct
some banks put limits on the amount that can be transferred
what is CHAPS?
clearing house automated payment system is same day transfer of funds, of any amount, from one bank account to another.
advantages of CHAPS
no limits on amounts that you wisj to transfer
some banks apply a daily limit for when transactions must be completed by
disadvantages of CHAPS
some banks charge to use this service
what is a current account?
a type of account offered by banks and building societies for frequent use in cluding deposits and withdrawls.
there are differnt types of current accounts:
standard
packaged, premium
basic
student
what is a standard account?
the most common account for individuals assuming they have an OK credit score
these pay and charges interest depending upon whether the balance is positive or negative
these come with cheque books and credit cards
advantages of student accounts
widely accepted overdraft facility is offered range of services can set up direct debits and stnading orders can make cash withdrawls
disadvantages of student accounts
limited additional benefits
charges on oberdraft, bounced cheques can be high
what is a packed/premium accounts?
a type of account that offers the same features as the standard account, but comes with more features such as car breakdown cover.
comes with a cheque book and debit card
overdraft limit, interest charges and payments
advantages of packaged/premium accounts
range of services
additional benefits
ease of coordinating different aspects of personal finance e.g. insurance is added so you dont have to shop around separately
disadvantages of premium/packaged accounts
often charges additional fees
generic rather than tailored to individual needs e.g. travel insurance may be of no added benefit
what is a basic current account?
a type of account, with limited features, that is designed for high risk customers, who would struggle to open an account due to low credit score
advantages of basic current accounts
an opotunity to open an account for those who may otherwise struggle to be accepted by a financial institution.
disadvantages of basic current accounts
limited services
carry’s embarrasment
what is a student current account?
a type of account designed to meet specific demands of students
advantages of student current accounts
meets needs of students
additional perks such as discounts on books
understands the timing of student cashflow
disadvantages of student current accounts
will need to transfer account after graduation
charges on overdraft, bounced cheques and others could be high
what is an overdraft?
the facility to overspend on a current account up to an agreed sum. an individual can withdraw money, which is not there, from bank accounts. however, interest is charged on overdraft.
advantages of an overdraft
only borrowed when required, allowing flexibility
only pay for the money borrowed
quick
disadvantages of an overdraft
the bank can call it in at any time
only available from a current bank account
interest payments tend to be variable making it more difficult to budget
banks may secure the overdraft against an asset
what is a personal loan?
a set amount of money provided to an individual or couple for a specific purpose and is to be repayed with interest. this may be secured against an asset.
advanatges of personal loans
receive an immediate cash injection, which could be portentially large
quick to set up
disadvantages of personal loans
interest may be high
interest must be paid off
can be charged for early payments
if charged, assets could be taken away
what is a hire purchase?
spreading the cost of a purchase over a pre- agreed period of time. the customer will receive the item straight away and pays in monthly instalments.
advantages of hire purchase
the customer gets to use the item immediately
spreads the cost over time
fixed installments
disadvantages of hire purchase
interest rates may be high
payments must be made regularly or item will be repossessed
what is a mortgage?
a long term loan to fund the purchase of an expensive item such as a house
advantages of a motgage
makes it possible to buy expensive items
spreads the cost over a long period of time
disadvantages of a martgage
interest rates may be high
may not receive a mortgage
normally require a deposit of 20% of the items price
risks of repossession if payments are not substantial
what is a payday loan?
a short term loan, for a small amount of money, which is repaid upon the customers next income
advantages of payday loans
solves short term cashflow problems
quick access to funds
diadvanatges of payday loans
high rates of interest
need to be repaid quickly
can escalate out of control if payments are not made
what is individual savings account (ISA)?
a savings account that does not charge tax on interest earned
advantages of ISA’s
banks will pay interest on balance
disadvantages of ISA’s
charged to withdraw savings
what is a deposit and savings account?
accounts held with banks or building societies where intrest is paid on positive balances
advantages of deposit and savings account
the value of savings will increase, assuming withdrawals are not made, as a result of interest received
high interest rates receieved in favour
disadvantages of deposit and savings account
penalise savers for taken out money early
funds cannot be withdrawn immediately
what is premium bonds?
a government incentive for individuals to save by which savings are entered into a monthly prize draw
what is bonds and gilts?
individuals or companies lend money to the governmentin return for an IOU
fixed rates of interest is paid on the loan
what are shares?
shares are investments made when individuals or organisations become part owners of a business
shareholders are to receive income in the form of dividends paid from company profits as well as to gainwealth as share prices increase.
what is a pension?
savings plan by which the individual makes regular contributions to a pension policy
the objective is to plan for the future so that an income is available upon retirement
which is more of a higher risk?
savings or investment
investments as the money could be lost
